Hurricane Sandy a harsh reminder of supply chain vulnerability

Supply chain vulnerability: Hurricane Sandy puts risks in spotlight

Before Hurricane Sandy even arrived on the shores of lower Manhattan and New Jersey, experts were already predicting the storm would cause a massive business washout. While most of the world was rightly focused on the human toll of the hurricane, there was little doubt Sandy would wreak havoc on the business world.

The damage it would cause was estimated to be approximately US$60-billion — US$10-billion in property damage and US$30-billion to US$50-billion in lost business, according to forecasting firm IHS Global Insight. Those figures are likely not far off the mark, given the New York area is a major contributor to America’s total economic output and home to thousands of head offices, factories and warehouses, not to mention crucial ports, airports and highways.

Sandy served not only as a reminder of changing climatic patterns, but the impact of those patterns on business. Hurricanes such as Sandy as well as floods, political unrest and economic volatility have put supply chain risk management front and centre in global conference agendas.

At the January 2012 World Economic Forum in Davos, Switzerland, the shifting tide of supply chain risk management was a topic that generated much debate — and a detailed collaborative report titled New Models for Addressing Supply Chain and Transport Risks.

In taking into account the past five years of widespread and varied global turmoil, the report states unequivocally that supply chain risk profiles have changed dramatically. The causes are many, including environmental (natural disasters), geopolitical (political disruptions), economic volatility and technological and infrastructure failures.

Related

Nature and politics have both delivered a heavy-handed wake-up call to supply chain risk management, especially offshoring activities, confirms Jason Myers, president and CEO of Canadian Manufacturers & Exporters (CME) in Ottawa. “Volcanoes, tsunamis, floods — these had a huge impact on the electronics and automotive supply chains, virtually shutting down production in some cases. That was a big shock to companies that had modelled operations on a limited number of suppliers.”

These aren’t the only things that keep executives up at night. “It’s all through the system,” Mr. Myers says. “It’s regulations, it’s customs, what’s happening in shipping and transportation. It’s also about labour costs, getting the skills you need and even securing the safety of employees working abroad.”

There has indeed been a significant shift in how we perceive and manage supply chain risk, says Bob Armstrong, president of Supply Chain & Logistics Association Canada (SCL) in Markham, Ont. “Supply chains have become increasingly interdependent because of their reliance on lean practices and just-in-time delivery systems. At the same time, in doing that they’re more exposed than we’ve ever been to disruptions. And climate change has made things more volatile than ever.”

However, while the recent barrage of setbacks has caught people’s attention, their reaction is sometimes well behind intentions, he adds. “Just because organizations are aware of the risks they face it doesn’t mean they’ve done anything about it.”

As supply chain risk awareness grows, Michael Denham, president for Accenture Canada in Montreal contends that “companies now need to understand how to get on top of those risks.”

He recommends some very practical steps to deal with the brave, new world of supply chain risk:

— Really understand the inherent risks across the entire supply chain including your suppliers so you can anticipate, monitor and mitigate them.

— Engage in scenario planning around those risks, whether they’re natural disasters or port congestion, to understand their implications in terms of production schedules, deliveries, etc.

— Use dual sourcing so you can ramp up and down as needed if production flow is interrupted from a primary source. Also, use open versus proprietary standards around product design. The more proprietary your design, the harder it is to get additional suppliers.

— Decrease supplier distance. “We’re seeing more hemispheric sourcing and on-shoring,” Mr. Denham says. “While it doesn’t alleviate all sources of risk, it does reduce some of the logistics issues.”
Of course, not every disaster can be anticipated, notes Jérôme Thirion, partner, business effectiveness and supply chain operations for KPMG Canada in Montreal. That doesn’t mean that organizations can’t be proactive in their mitigation strategies. “While you can’t forecast a tsunami, you can anticipate quite extensively.”

A good start is building an optimized, organized distribution network that can quickly react to change. A risk analysis should also be performed based on your operations, suppliers and customers in order to assess your ability to affect change in process.

He also advises organizations to attribute a hard cost to each risk. “Perhaps a higher per-unit [production] cost may be preferred versus the unknown cost of risk exposure.”

In addition to dual sourcing and backup supply arrangements, he recommends structuring effective, solid agreements with key suppliers to ensure capacity needs are met and that you don’t move down the priority list in the event of a disruption. “Building supply chain redundancy also means geographical and currency diversification,” Mr. Thirion says.

Perhaps the biggest question on the supply chain table these days, Mr. Myers believes, is who is managing the risk? “Usually the onus was on suppliers to manage the currency fluctuations and cross-border management. With the focus on quality control and environmental management, that’s changing as well. Now the responsibility is on the customer to work with suppliers to ensure quality and value throughout the supply chain.”

Understandably there is a cost to risk management — especially when it means investments in redundancy and technology infrastructure to support global operations. But the consequences of not investing can be dire.

“While you can’t eliminate the risk, at least you can identify it and do something about it,” Mr. Armstrong says.

Almost Done!

Postmedia wants to improve your reading experience as well as share the best deals and promotions from our advertisers with you. The information below will be used to optimize the content and make ads across the network more relevant to you. You can always change the information you share with us by editing your profile.

By clicking "Create Account", I hearby grant permission to Postmedia to use my account information to create my account.

I also accept and agree to be bound by Postmedia's Terms and Conditions with respect to my use of the Site and I have read and understand Postmedia's Privacy Statement. I consent to the collection, use, maintenance, and disclosure of my information in accordance with the Postmedia's Privacy Policy.

Postmedia wants to improve your reading experience as well as share the best deals and promotions from our advertisers with you. The information below will be used to optimize the content and make ads across the network more relevant to you. You can always change the information you share with us by editing your profile.

By clicking "Create Account", I hearby grant permission to Postmedia to use my account information to create my account.

I also accept and agree to be bound by Postmedia's Terms and Conditions with respect to my use of the Site and I have read and understand Postmedia's Privacy Statement. I consent to the collection, use, maintenance, and disclosure of my information in accordance with the Postmedia's Privacy Policy.